Using fintech for financial good

Two years ago, Teresa Hodge and daughter Laurin Leonard received an intriguing request from a local Baltimore bank. Could the two women, who ran a nonprofit aimed at helping formerly incarcerated inmates start their own businesses, help them vet two loan candidates with criminal records? The usual assessment method, the traditional FICO credit score, wasn’t up to the complexities of the task, so Hodge and Leonard spent three days developing a rubric that made sense.

That’s when they realized they were onto something with bigger potential — a technology that could help ex-inmates battle one of the major impediments to reentering society. With that in mind, they launched a startup, called R3 Score Technologies, to refine and market the platform, combining data from multiple sources, such as criminal records, employment experience, and self-reported information by individuals. Ultimately it produced a numeric score, much like the FICO system, predicting how risky a potential borrower would be. “I wanted to use technology to bring about systemic change,” says Hodge. “It could help not only banks, but also the men and women living with a record desperately trying to get back on their feet.”

R3 is part of a new breed of tech startups focused on using technology to achieve financial equity for underserved populations, while also building profitable enterprises. Call it fintech for fairness. They’re riding a wave of entrepreneurial interest in building companies aimed at social good, along with tapping a variety of highly accessible and affordable digital innovations, from machine learning to cloud computing. “These businesses are trying to level the playing field so disadvantaged people have access to financial products and services they may not have had access to before,” says Amanda Swoverland, chief risk officer of Sunrise Banks in Saint Paul, Minnesota.

Certainly, the startups’ shared raison d’etre is to address issues of economic equity. But they vary in their approaches and target markets. R3, for its part, focuses on making credit reporting fairer. By analyzing a complex array of data, its platform provides a more nuanced and in-depth analysis of an individual’s past record and future potential, all summarized in a score that’s easy for banks and other financial institutions to understand. On the other hand, while three-year-old startup Nova Credit also targets the problem of credit reporting, the San Francisco startup zeroes in on immigrants in the U.S. who can’t get auto loans, mortgages, and the like because they lack any credit history in the country. Working with overseas credit bureaus, the company collects a variety of records then condenses them into a single report, which it supplies to potential lenders. “We’re a data infrastructure company that supports financial inclusion for people who immigrate to the U.S.,” says CEO and co-founder Misha Esipov.

Other startups target low- and middle-income workers living paycheck to paycheck and those who depend on government assistance. For example, New York City-based Propel helps food stamp recipients get the most out of their benefits. “With food stamps, the most vulnerable people are forced to go through the worst hoops with the worst technology,” says Jimmy Chen, who founded the company in 2014. “It’s completely unfair and a systemic failure.” With that in mind, Propel’s app lets recipients easily check their current balance using their Electronic Benefit Transfer (EBT) payment card, connect to other social services, get access to grocery store discount coupons, and apply for jobs. More than 2 million people use the app each month, according to Chen.

Like many fintech for fairness entrepreneurs, Chen’s motivation was equal parts personal and research-driven. Growing up in a family that struggled to make ends meet, he attended Stanford University on a full scholarship. Then, after four years as a product manager at Facebook and LinkedIn, he decided to do something more meaningful with his skills that could help low-income populations. Not quite sure what form that should take, he signed on with Blue Ridge Labs @ Robin Hood in New York City, an incubator for entrepreneurs exploring ways to address poverty. There, he was given access to a pool of low-income residents who talked to him about their lives and eventually honed in on the challenges faced by food stamp recipients.

Even though their ultimate customers are rank-and-file consumers, these companies frequently find it’s more efficient to rely on employers or other institutions for distribution.

Take Even Responsible Finance. The Oakland, California-based company’s app helps workers who live paycheck to paycheck tap their wages before their actual payday. Plus it connects to the employer’s payroll system so individuals can see clearly how much they’re going to earn during the next pay period. In addition, using machine-learning technology — it took three years to build, according to co-founder and CEO Jon Schlossberg — the system shows how much workers’ upcoming bills will total and how much will be left over after paying those charges. And it suggests other steps to take, like building an emergency fund by automatically directing money from paychecks to appropriate accounts once people opt in.

From the start, however, Schlossberg figured he would work with employers that could offer the startup’s service to their employees. That’s partly because there would be a lower customer acquisition cost than going direct to the consumer. But as important, by working with employers and connecting to their payroll systems, Even has been able to move money to employees more quickly and even experiment with different services. Walmart now offers the service to its U.S. workforce of 1.3 million.

Ultimately, for fintech for fairness startups, doing their part to address problems of economic inequity is as important as making a profit. “In our society, business is the most effective way to effect change at scale,” says Schlossberg. “That’s the reason I started a company.”